Juggling act for Brash on rates

By Brian Fallow

Between the lines

Reserve Bank governor Don Brash will need both hands when handing down his quarterly monetary policy statement tomorrow.

On the one hand the world economy is looking better than it did three months ago; on the other the New Zealand economy is looking worse.

The upshot, in the view of just about every pundit, is that Dr Brash will leave the official cash rate unchanged.

The statement will be pored over, however, for signs that the bank is bringing forward its projection of when it will start raising interest rates. The May statement did not foreshadow any increase until the second half of next year.

The consensus among forecasters at the moment is clustered around March 2000 for the start of the next tightening phase, with a minority favouring an earlier move in November of this year.

The case for a March tightening is based on three main factors:

* Economists' forecasts of economic growth in New Zealand's trading partners have been revised up substantially, brightening the prospects of a struggling export sector. There are some signs prices for New Zealand's export commodities have turned the corner.

* The kiwi dollar is weaker than the bank projected three months ago.

Whether overall monetary conditions are much more stimulatory is debatable, however, as longer-term interest rates have been on the rise which has already fed through to the fixed mortgage rates on offer, for example.

* The housing market has rebounded faster than the bank was expecting. Building consents are strong, house prices in the last three quarters have recovered most of the ground lost in the previous year, and mortgage borrowing has risen 10 per cent over the past year.

Offsetting all that, however, are signs that the domestic economic recovery has lost traction over the June quarter:

* There was no growth in employment during the quarter, and job advertisements are tapering off.

* Retail sales were up only 0.4 per cent in volume terms in the quarter, and much of the growth was concentrated in the car saleyards.

* Business and consumer confidence continued to fall from the dizzy heights they reached early in the year.

Combined with a negative contribution from net exports, these factors are expected to yield a June GDP number of around 0.4 per cent - half the average of the previous two quarters.

Even if the Reserve Bank sees this slowdown as temporary, as is likely, it means the slack in the economy inherited from last year's recession is being taken up less rapidly than it thought.

Also counting against a November tightening is the fact that it would be either a few days before or a few days after the general election.